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I came across the following question. Please help.
A single product firm working at full capacity has following data;
Production & sales for the year – 20000 units
Machine capacity available and fully utilised – 40000 hrs
Per units data;
VC $8.20
FC $1.30
Selling price $12.50An order for 3000 modified units which requires 6600 of machine hrs was received with a additional material cost of $1 per unit.
The decision to accept or reject should be taken at the price;
A. $41,790
B. $40,500
C. $27,600
D. $17,190The answer according to my calculations is $44,250. Following are my workings;
VC per machine hr – (8.2×20000)/40000= $4.10
Contribution per machine hr – {(12.5-8.2)x20000}/40000= $2.15
Addition material cost per unit = $1Therefore the relevant cost is;
VC – $4.10×6600 = $27,060
Contribution foregone – $2.15×6600 = $14,190
Additional Material – 1×30000 = $3,000
Total relevant cost (min price) = $44,250Please clarify. Thank you.
I have to say – I do agree with your workings and logic. Possibly the question has a bit missing in it – or there is a mistake in the possible options?
This happens from time-to-time – don’t let it put you off – your understanding of the topic is ok in my opinion.
In a real exam I would come to an aswer this way.
1) Contribution forgone: 6 600 hours / 2 hours per unit = 3 300 units could be produced in normal course of business. 3 300 * ($12.5 – $8.2) = $ 14 190.
2) Additional material: 3 000 * $1 = $3 000.
3) VC: 3 000 * $8.2 = $ 24 600 (steps 2 and 3 can be combined: 3 000 * $9.2 = $ 27 600).So I would choose option A – $41 790 ($14 190 + $27 600 = $41 790).
Regards,
YRBHi yes apologies. I’ve seen quite a few errors in questions recently -I assumed too quickly that this was one!
The only small error that amithrad has made in his workings is to apply the variable cost on an hourly basis rather than a per unit basis.
Variable cost of making the special order items would be 8.20 x 3000 units =$24600 then adding on the $1 for modifying each unit makes 1 x3000=$3000)
The lost contribution is worked out in hours and was correct as stated 6600 x 2.15 = 14190…
All together these figures come to $41790
Answer A.
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